Accessing private capital

Don Stowers  

Don Stowers
Editor-OGFJ

This month's issue of Oil & Gas Financial Journal focuses on private capital and the availability of funding for upstream and midstream projects. The consensus among our expert contributors appears to be that 2013 will continue to be an attractive time to sell or recapitalize middle market companies by accessing private equity.

In our interview with Premier Natural Resources' Chris Jacobsen this month, he notes that his company's partnership with investment giant Kohlberg Kravis Roberts has created a portfolio of properties that produces about 250 million cubic feet equivalent of gross natural gas production per day, and this continues to grow. Premier's partnership with KKR has acquired more than $1 billion worth of assets since March 2010.

In their article, "Current state of the capital markets," Bill Boyar of Boyar Miller and Cliff Atherton of GulfStar Group note that the public capital markets have not been favorable for large-cap diversified energy companies over the past year and a half, and they don't see much reason for optimism, at least not for the near term.

John White, an analyst with Triple Double Advisors, recently told OGFJ that most oil and gas company stocks continue to underperform versus the market as a whole, so his firm has taken a "defensive" position in this regard. "The only sectors that have relatively stable stock price performance are the large-cap petroleum stocks and maybe a few mid-caps," he said. He also expects this trend to continue for a while.

Boyar and Atherton say that uninvested private equity commitments have driven private equity activity and will continue to do so for the next year. "With more than $400 billion of capital, representing approximately $1 trillion of transaction capacity, available to [private equity] firms at risk of losing commitments, sponsors are actively seeking investment opportunities. These include upstream, midstream, downstream, and service, with a recent shift in focus from upstream to midstream and downstream deals."

They note that "healthy companies" with experienced management teams are the most attractive targets for private equity investors looking to get capital vested.

In his article "Trends that are driving private capital investment," Chris Manning of Trilantic Capital Partners says that private equity is currently playing a major role in the oil and gas industry due in part to constraints in the public capital markets. He notes that capital investments in energy being raised by private equity firms doubled in the past three years to $33 billion.

PricewaterhouseCoopers points out that private equity oil and gas deal volume was at a 20-year high during the first quarter of 2012, as the volume of merger and acquisition activity reach 11 transactions and a total deal value of $11.5 billion, a 267% increase in volume of activity compared to the same period in 2011.

Manning says that open market private equity deals in upstream oil and gas companies were valued at around $4 billion from 2006 to 2010. From January 2011 through April 2012, that figure jumped to $18 billion.

In her article "Private equity investment surges in midstream sector," Bracewell & Giuliani attorney Elizabeth McGinley notes that dramatically increasing volumes of shale gas and oil production are creating a critical need for midstream infrastructure to transport and store such production. She estimates that the cost to develop the necessary midstream infrastructure to get this done could reach $200 billion. Accordingly, there is a tremendous demand for capital to fund infrastructure development.

"Fortunately, the pool of private capital to be invested in oil and gas midstream assets is also growing," says McGinley. She adds that many investors that previously had a general interest in US shale gas and oil assets are now "sharpening their focus" and are seeking more specific investment opportunities in midstream assets.

"New funds dedicated solely to investment in midstream infrastructure have been formed and are gaining popularity," she says. "Accordingly, the combination of the high demand for midstream asset development and private funds' increasing interest in midstream assets has led to a dramatic increase in private fund investment in midstream infrastructure in the past year."

She expects this trend to continue at least through 2013.

In summary, the authors believe that private equity will continue to be a vital capital provider to the energy industry in the coming year, and the investors will work alongside their partners in the industry to finance oil and gas development, which includes building out the infrastructure needed to deliver it to markets.

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